Fair Isaac's New Scoring Model Downplays Medical Debt

Fair Isaac Co. revealed Thursday that its revamped credit score model will not weigh medical debt as heavily as previous versions, a key change given that medical debt accounts for nearly half of all unpaid collections on consumers' credit reports.

The new model, along with differentiating medical debt sent to collectors from non-medical debt, includes fresh methods for evaluating consumers with limited credit history.

Fair Isaac decided on the new approach after meeting with major lenders, other large customers and regulators. The groups suggested medical debt is unfairly penalizing consumers' scores.

"This will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent," Fair Isaac officials announced. "These enhancements help lenders because they result in greater precision. At the same time, the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.

Fair Isaac will provide the model to the credit bureaus in the next month, which will then start their own testing and verification process, said Anthony Sprauve, a senior consumer credit specialist with the Minneapolis-based company. Once that is done, the general scorecard will be made available to lenders.

Rather than classifying a consumer as someone who paid or didn't pay his or her bills in absolute terms, the FICO 9 credit score quantifies the degree of severity that different types of debt have on a consumer's payment history.

The new model will ignore overdue payments that have been made as opposed to factoring both paid and unpaid collections over $100 equally. The updated scores will help more consumers qualify for improved interest rates on loans.

The Consumer Financial Protection Bureau released the results of a study in May, using data from five million anonymous credit records, that found consumers may be unfairly penalized for medical debts that go to collections.

Consumers with medical bills in collection can see their credit scores hit by as much as 22 points, the CFPB study revealed, compared to those with other types of debt. The agency said credit scoring models were harming people with medical debt because they do not differentiate between medical versus non-medical debts nor paid versus unpaid medical bills when in collection.

FICO credit scores are based on the information from the credit reports generated by Equifax, Experian and TransUnion.